Plan - don't predict
Happy Thanksgiving! And for those observing the Jewish New Year, Shana Tova, and have an easy fast.
Maximizing the value of your business - start today!
Many business owners dedicate a lifetime to growing their business which is often the nest egg from which they can afford to slow down or retire. The CRA provides key support to help business owners achieve their goals through a tax planning strategy that uses the long-term capital gains exemption or LCGE.
LCGE - Long Term Capital Gains Exemption
The LCGE allows owners of qualified businesses to keep more of the proceeds of the sale of their business. Today, a business owner can receive up to a maximum of about 500,000 tax free when they sell their business. This strategy isn't limited solely to the primary business owner but can apply to other owners of the business including family members. That is, if structured properly, the LCGE can be multiplied by the number of family shareholders. A family of 4 could potentially benefit from $2M of savings, rather than just $500,000.
To take advantage of the LCGE there are several hurdles that must be overcome. Some of these measures must be achieved well in advance of the business sale. Because of this, business owners need to plan well ahead to be ready to sell when the opportunity arises. There are several elements that form a successful strategy to benefit from the LCGE. We'll touch on some of those details below.
The when and how of multiplying the LCGE - one strategy.
1) Your business must first be set up as a Qualified Small Business Corporation, QSBC.
2) you will need a flexible structure to achieve this goal. Below is an example of how this could be done.
(i) Below, the business owner establishes a Holdco with the corporation issuing special voting shares allowing them to maintain control of the company.
(ii) A family trust is then settled and subscribes to shares of the Holdco with the Holdco being named one of the beneficiaries of the Family Trust.
(iii) The business owner then swaps their operating company (the "company") shares for preferred shares and special voting shares.
(vi) the family trust subscribes to the non-voting shares of the Opco.
Family Trust / Estate Freeze Structure for LCGE Maximization and Flexibility
Source: RBC Dominion Securities Family Office Services
3) The Trust must hold the shares for 24 months for family members to qualify for the LCGE. This is a crucial test that must be passed. Without proper preparation, the opportunity to sell one's business and take advantage of the LCGE could be missed or pushed into the future when the right buyer might not appear.
This structure would also be instrumental in ensuring that the Company is always purified. Purification involves removing any assets that are not being used for the business and could include property as well as cash or investment assets not involved in operations.
The above is a greatly simplified explanation of how one would proceed to prepare for their business sale and maximize LCGE. To learn more about setting up your business for a tax-efficient sale, please get in touch. We'd be happy to set aside some time to see if our business owner planning solutions can help.
Reading the Tea Leaves - Where Might the Equity Market Go from Here?
Although stock market charts contain more useful information than a cup of tea leaves, long time readers will know that we generally don't place a great deal of faith in technical analysis.
Apparently black tea is the most predictive, especially when served with Dim Sum.
One thing we have learned over a very long time is that the markets tend to go up. Simple as that. How they go up and when they go up is anyone's guess. For the S&P500, our favourite go-to source to view the market, there is an astounding correlation between the growth in earnings and the increase in the price of stocks. Specifically, the S&P500 price growth has been nearly perfectly correlated with the average increase in earnings of about 7.2% over decades. That is the real edge in the market. It has a positive drift.
Averaging In.
Many investors get very concerned about buying the market when it is at the highs. But according to history, the market is nearly always at the highs. Buying on a pull back is a great strategy when it presents itself. But it's not always easy to buy on dips because investors get scared. A very effective way to invest is to avoid timing and simply add amounts to your account on a regular basis. Let the market take you where you need to go. And as David Chilton always says, "pay yourself first." Great advice.
Speaking of all-time highs, how far can we go from here? Let's have a look at the S&P500.
Source: RBC Dominion Securities, Optuma
Looking at the green channel, we can see that consistent growth in the price of the index which meanders up and down through the highlighted, green channel. We appear to be middle of the range right now. From the longer-term investing view, the market is right in the middle of the range. Goldilocks? Maybe. Not too hot, not too cold.
Is now a good time to buy? To sell? Your needs and plan are more important than what the market is doing.
Ultimately, the driver of a properly managed portfolio is the individual investor's needs. If it's time to buy a house, it really doesn't matter where the market is. You need to exit and preserve capital. If you are saving regularly for retirement in 10 years, it doesn't matter if the market is down or up that day or week or year. The perceived amount of value related to timing the market is mostly an illusion. We believe that portfolios should be driven by a financial plan and not on market timing.
And with that, we'll wind up as always with this week's Global Insight. Have a great long weekend and don't hesitate to get in touch to learn more about business owner planning, tax, and investing strategies.
In this week’s issue:
Debunking debt disaster: Myths may be important to folklore, but they’re not helpful in finance. We look at the facts behind some of the common myths surrounding the U.S. national debt.
Regional developments: S&P/TSX Composite Index continues to climb higher; U.S. job openings reach a three-month high while risk assets continue to outperform; France: Austerity is back, European auto sector: Cheap for a reason; China stimulus likely to help stabilize property market
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